One and Done? Will the Fed Make a Small Cut, Then Quit?

Almost everyone, even the Federal Reserve, thinks it is going to lower short-term interest rates this month. But how much will that be? Maybe just a quarter point, then it will be done for the year.

Federal Reserve Chairman Jerome Powell, who earlier called a halt to the ongoing campaign to ramp up the benchmark federal funds rate by a quarter percentage point (25 basis points) every three months or so, has been sounding dovish notes.

The Fed’s policymaking panel, the Federal Open Market Committee (FOMC) meets July 30-31, and expectations in the futures market are high (72% probability) for a cut of a quarter point. By year-end, wagers at the CME Group are for two more quarter-point reductions.

“Many FOMC participants judge that the case for somewhat more accommodative policy has strengthened,” Powell told the Council on Foreign Relations in New York last week.

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Nonetheless, it doesn’t follow that Powell wants the Fed to lower rates as significantly as the futures market foresees. He has made clear that the central bank will go its own way, depending on the economic data, which remains encouraging, although slowing down.

The Fed likely will lower rates by only a quarter-point this year, in the view of Brad McMillan, chief investment officer at Commonwealth Financial Network. He expects the top rate of the federal funds rate, now 2.5%, to be lowered to 2.25%. “Overall, the real monetary policy story of the balance of 2019 is likely to be that there is no story,” he wrote in a research note.

James Bullard, the St. Louis Fed chief, said in an interview on Bloomberg TV that a quarter-point dip would be sufficient. “I think 50 basis points would be overdone,’’ he said. “I don’t think the situation really calls for that. But I would be willing to go 25.’’

President Donald Trump has loudly been demanding that the Fed lower rates drastically, saying the central bank “blew it” by not doing this in its last meeting and is acting like “a stubborn child.” Of course, the president wants to see the economy get as much juice as possible so it looks good when he seeks reelection next year.

Interestingly, Powell has pushed back, emphasizing the independence of the Fed. At the same New York appearance, Powell emphasized that “the Fed is insulated from short-term political pressures.”

Commonwealth’s McMillan and many others point out that economic growth is decelerating in the US and around the world. “Economic growth is slowing, inflation has moderated, and the Fed’s plans are consistent with those developments,” he indicated. “So, interest rate policy becomes driven by stability rather than change.”

At the same time, the economy remains in pretty good shape. Unemployment, at 3.6%, is at its lowest point in 50 years, and is expected to stay there when the June jobs report comes out on Friday.

Fed Chair Hints He May Ease Off on Rate Boosts

Hey, Maybe the Fed Should Cut Interest Rates

Tags: Donald Trump, Federal Reserve, Interest Rates, Jerome Powell

The Supreme Court will rule on whether pension beneficiaries can sue a retirement plan that lost money in its investments, even though the plan itself later restored its fully funded status. At issue: Where is the harm in a temporary downdraft?

James Thole and Sherry Smith allege that the US Bancorp Pension Plan violated basic fiduciary responsibilities when it invested all of the program’s assets in high-risk equities. The two filed suit in 2013, claiming the bank’s bid to diversify investments lost $1.1 billion during the 2008 financial crisis. This loss dropped its once-overfunded plan to 84% funded. The plaintiffs believe a better diversified portfolio would have shielded $748 million from the market crash.

When these objections were first raised, the plan sponsor kicked in $339 million and the plan again became overfunded, at 115.3%, with $86 billion in assets under management.

A lower court and the US Court of Appeals for the Eighth Circuit threw out the case, Thole vs. US Bank, saying that the US Bancorp Pension Plan had recovered and was now stable, therefore negating the losses.

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However, the Supreme Court didn’t accept this reasoning as sufficient to toss out the lawsuit. The high court aims to explore if a fiduciary breach is enough to let Thole and Smith pursue a remedy.

Last summer, Thole and Smith’s counsels, Cohen Milstein Sellers & Toll and Stris & Maher, asked the Supreme Court to review the 8th Circuit’s decision. The US solicitor general last fall recommended that the high court should indeed look into the matter.

This is the third case this year related to purported violations of the Employee Retirement Income Security Act of 1974 (ERISA). The statute protects pension beneficiaries from losing their retirement assets. The ruling will determine whether Americans in defined benefit pension plans have the right to sue their fund’s fiduciaries for mismanaging assets, regardless of the plan’s funded status.

The hearing is expected to take place later this year, and if the plaintiffs win, it could change the risk appetites of institutional investors. This would drive more allocators toward passive investing and put more of their assets into safer areas, such as bonds. It could also create problems for hedge funds and other riskier strategies.

“Under the 8th Circuit’s rule, participants could do nothing to stop a fiduciary from betting their retirement savings on horse races until the plan was underfunded,” said Peter K. Stris, a founding partner of Stris & Maher. “Not only is this unconscionable, it conflicts with the remedies Congress explicitly authorized and with centuries of precedent allowing trust beneficiaries to sue for fiduciary misconduct.”

Multiemployer Plans Faltered in Second Half of 2018

Tags: Lawsuits, Pension, Thole v US Bank, US Bancorp Pension Plan, US Supreme Court